Unit 3.1 - Sources of finance Flashcards
Capital expenditure
Investment spending on fixed assets such as the purchase of land and buildings
Revenue expenditure
Spending on the day-to-day
running of a business, such as rent, wages and utility bills
Sources of finance
General term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans and government grants
Internal sources of finance
Getting funds from within
the organization
(e.g. through personal funds, retained profits and the sale of assets)
Personal funds (ISF)
- The use of an entrepreneur’s own savings
- Personal funds are usually used to finance business start-ups
Retained profit (ISF)
The value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders
External sources of finance
Getting funds from outside the organisation
e.g. through debt (overdrafts, loans and debentures), share capital, or the government
Sale of assets (ISF)
Selling dormant assets such as old machinery that have been replaced
Share capital (ESF)
The money raised from selling shares in a limited liability company, from its initial public offering (IPO)
and any subsequent share issues
Initial public offering (IPO)
A business converting its
legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time
Loan capital (/debt capital)
Medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures
Overdrafts (ESF)
- Allow a business to spend in excess of the amount in its bank account, up to a predetermined limit
- Most flexible form of borrowing in the short term.
Trade credit (ESF)
- Allows a business to buy now and pay later
- The credit provider does not receive any cash from the buyer until a later date (usually allow between 30-60 days).
Grants (ESF)
- Government financial gifts to support business
activities - Aren’t expected to be repaid by the recipient.
Subsidies (ESF)
Funded by the government to lower a firm’s production costs as out put provides extended benefits to society
(e.g. farmers are often provided with subsidies to stabilise food prices)
Debt factoring (ESF)
A financial service whereby a factor (such a bank) collects debts on behalf of other businesses, in return for a fee
Leasing (ESF)
- A form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee)
- The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets
Venture capital (ESF)
- High-risk capital invested by venture capital firms, usually at the start of a business idea
- The finance is usually in the form of loans and/or shares in the business venture
Business angels (ESF)
Wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential
Sale-and-leaseback (ESF)
- Involves a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back
- In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business
Short-term finance
Sources of finance needed for the day-to-day running of a business
(i.e, revenue expenditure)
Medium-term finance
Sources of finance of one to five years in duration, used mainly to pay for fixed assets (i.e. capital expenditure)
Long-term finance
Sources of finance of more than five years, used for the purchase of fixed assets or to finance the expansion of a business
Share issue (/share placement)
Exists when an existing public limited company raises further finance by selling more of its shares
Stock exchange
A highly regulated marketplace where
individuals and businesses can buy and/or sell shares in public limited companies (joint stock companies)
